This is something that I’ve touched on before, but I recently got involved in an extended discussion on the subject on the LYN, so I’ll post a summary here. To me, the argument in favor of inheritance taxes is painfully obvious. Unless you’re a tax-hating anarcho-capitalist, in which case I invite you to move to Somalia, everyone agrees that every country needs to raise taxes somehow to function. And for the sake of fairness, it is a given that taxes should be progressive. This not only means that folks who are better off needs to pay more taxes as an absolute figure, but that they need to pay more as a proportion of their total income and wealth.
This means that inheritance taxes need to be a part of any reasonable tax system as they’re probably the most progressive form of tax possible. True, you can make income taxes highly progressive by vastly increasing the marginal tax rates for the highest income tiers, but economists generally agree that this is inadvisable that extremely high income tax rates create a disincentive to work. Inheritance taxes have similar effects, but to a much lesser degree than income taxes. Given all this, what are the objections to them. The following is directly from one my posts on LYN:
1. The Malaysian government would waste the additional income anyway.
This is a facile argument that I am tired of encountering again and again. The main problem is that it is a general catch-all that can apply all too readily to oppose anything and everything undertaken by the Malaysian government. Why even pay any income tax at all if this is genuinely your position? Why pay sales taxes? Why not simply insist that the Malaysian government provide all manner of free goods and services to citizens since the powers-that-be have so obviously stashed so much money in their socks? Why not come right out and advocate armed rebellion?
While I am certainly no fan of the government and I acknowledge that our government works very poorly, I, for one, am glad that we do have a government. We may not have the kind of government that we would prefer, but at least, we’re not Somalia, or Zimbabwe, or Afghanistan. I appreciate that the government has provided me with essential services that I do make use of. I went to a government-funded primary school and while I wished that the government gave more money to the Chinese independent secondary school that I later went to, I’m pretty sure that they did get some government funding. Similarly, my wife is schizophrenic and regularly collects medicine for her condition for free from a government hospital. I can cite many, many more examples but I think you all get what I mean. All of this costs money and that money has to come from somewhere.
Secondly, this line of argument seems to assume that such policies take place in a vacuum and that everything is a simple either-or proposition. Instead of saying, “I oppose inheritance taxes because I am convinced that the government would only waste the money anyway”, wouldn’t it be more constructive to say, “I support inheritance taxes but only on the condition that the funds raised be used to lower income tax rates and to prevent the imposition of a general sales tax.” You are also perfectly free to state something like, “I support inheritance taxes in principle but I do not trust any BN-led government to administer them and therefore I advocate delaying rolling them out until after the BN is out of power.”
This discussion should be about the merits and flaws of inheritance taxes itself, not about the corruptness of the government administering it. Pretending otherwise is simply a cheap way of deflecting my argument without really offering any real counter-argument of your own.
2. Inheritance taxes are injust because my money has already been taxed once when I earn it!
First of all, whether you like it or not, double taxation is already a reality. You remember paying sales taxes in restaurants, right? This is going to get worse when the GST comes into being and that’s how it works all over the world. Secondly, in Malaysia, it’s not necessarily true that your money has already been taxed once, because Malaysia has no capital gains taxes! If you make a fortune by for example trading on the stockmarket, like Datuk Ishak Ismail recently did with Kenmark, you don’t need to pay any income taxes on your gains at all and when you leave it all to your spoiled brats, they don’t need to pay any inheritance taxes at all. Win-win! This is why Malaysia is a great country for capitalists. In fact, in countries that do have a capital gains tax, this is one major argument in favor of inheritance taxes, Without them, there would be a tax loophole when the capital gains are never realized when the original owner is alive and therefore never taxed.
But most importantly of all, arguing about the principle of double taxation is ultimately a pointless distraction. I can for example satisfy your desire to not have double taxation at all and still raise sufficient money for the state by arbitrarily raising one type of tax to ridiculous levels. For example, I could agree not to have inheritance taxes or sales taxes at all but in exchange I would raise income tax rates to, say, 70%? Would that make you happy? This is why when discussing taxes, you abandon silly talk about whether or not double taxation is right in principle. Instead, you pay attention to overall tax burdens after all of the different types of taxes are taken into account.
What infuriates me most of all is how even the middle-classes oppose inheritance taxes so vehemently. Naturally, any implementation of inheritance taxes will allow for an exemption for assets below a certain value. For example, in the US, the estate tax in 2011 will be imposed only on assets above the first $1 million at a rate of 55%. Personally, for Malaysia, I’d set the exemption much lower, around the median house price in the country plus a premium, say, with a lower tax rate as well. But the idea is that the tax should discourage large generational transfers of wealth and help mitigate the syndrome of the rich getting richer.
But the middle-classes protest anyway. This effect is similar to the one seen in the United States when the middle-classes opposed President Obama’s tax increases even though these would affect only those earning above US$250,000 a year. While the middle-classes don’t make anywhere near as much, they do aspire to being rich. As a matter of statistical fact, most of them will never reach that goal, but they’ve deluded themselves enough to think that they will and so regard the higher taxes as personally targeting them. It’s just another example of how the elite can dominate the debate and successfully persuade the middle-classes to side with them instead of the truly poor.